Latvia’s economy over past six months was warmed by services exports; consumption will drive growth this year
Latvia's economy in 2025 might experience low to moderate growth, with GDP growing by 1.5% and inflation rising by 2.5%, said Joona Widgren, Senior economist at OP Financial Group, a leading Finnish financial group, in the group’s quarterly Baltic Economic Outlook. He said that growth is boosted by rising services exports and private consumption but held back by low levels of investment and overall exports due to global uncertainty.
"Although Latvia’s economy saw a slight slowdown last year, by the end of the year the first signs of recovery were already visible. This year, growth is expected to pick up, but the recovery is being held back by the growing uncertainty and trade policy uncertainties. If Europe and the US agree to maintain or reduce tariff levels, economic activity may turn out to be stronger than currently forecast. This uncertainty has a particular impact on the investment sector, although public investment is developing relatively favourably. Overall, we see the economy moving towards recovery, but the pace is still cautious," explained Joona Widgren, Senior economist at OP Financial Group.
Latvia’s economy starts to recover
Wages are rising and interest rates are falling, therefore private consumption in Latvia is rising slightly. Exports of services are also developing more positively. Consumer confidence in Latvia has declined slightly but overall it remains at a relatively high level especially compared to the time of Covid-19.
In the coming years, the economist forecasts broader growth than in recent years, as the economy will be supported by rising private consumption, public investment and – although limited – modest export growth. He points out that the recovery in Latvia has already begun and will continue in 2026.
"In the situation of global uncertainty and geopolitical risks, we see moderate economic activity in Latvia, yet we remain cautious optimism. Despite weak growth in the euro area and tensions in international trade, previously launched investment projects in Latvia indicate the potential for a gradual GDP growth this year," says Elmārs Priksans, General Manager of OP Corporate Bank plc Latvian branch.
Lithuania sees faster growth than Latvia and Estonia
OP Financial Group forecasts the fastest GDP growth this year will be in Lithuania (2%), followed by Latvia with 1.5% and Estonia with 1% growth. Overall, Lithuania is in the best economic position, with growth largely driven by strong manufacturing and exports to the Central European countries, while in Latvia and Estonia manufacturing has been stagnating for some time and the range of export markets is narrower than for Lithuania.
The labour market has remained relatively strong across the Baltic region, supporting the resilience of the economy. Moreover, Latvia has the lowest unemployment rate among the Baltic countries. Compared to Estonia, where consumer confidence is low, Latvia is experiencing stronger growth in private consumption.
All Baltic countries are currently spending heavily on defence, and this spending is expected to continue to grow in the coming years. Compared to other European countries, the Baltics are in a stronger position due to their relatively low public debt levels, which enables them to increase defence spending.
World economic outlook: growth continues amid tariff uncertainties
"Despite growth in certain regions, the global economy continues to face significant challenges. Trade disputes are still putting pressure on the global economy as a whole. Meanwhile, the US economy is on the brink of recession, showing only moderate growth. In Europe, growth forecasts have also been downgraded since the end of last year – initially due to uncertainty, but later also due to the announced tariffs," the economist said.
The impact of the US-imposed tariff increases on Europe is likely to be relatively even, but some countries will be hit particularly hard. Italy, Ireland and Iceland are expected to experience the most negative effects, while Latvia and other countries in Eastern and Southeastern Europe are likely to be the least affected ones.
"The economic outlook for the European region remains clouded by several major risks - not only trade frictions and the tariff war, but also the geopolitical situation in general, including the prospects for a cessation of hostilities or a peace agreement in Ukraine," says the economist.
He points out that a lasting ceasefire in Ukraine could have a positive impact on the EU economy. It would boost demand, improve consumer and business confidence, and could contribute to lower gas prices if a stable agreement is reached. At the same time, defence spending is expected to increase and reconstruction efforts in Ukraine are likely to begin. However, the return of some Ukrainian refugees to their home country might slow down growth in Europe.